Daily Economic Update: May 14, 2025

May 14, 2025

The Market Has No Memory?

Obviously the market has no memory in the literal sense, it’s not a sentient being after all, but don’t we all use anthropomorphism when discussing the markets?  The way the collective “us” that is “the market” processes past market histories, the stories and emotions we assign to them, the way we like to look at charts, all give the market some semblance of a memory. 

After all, what is price action but the sum of expectations, reactions, traumas, and dreams—layered on by people who’ve been here before? And by people who think they’ve been here before.

The ghosts of 2008, the Covid crash, even the recent rate hikes still whisper through risk premiums and investor skittishness. They don't show up in earnings reports. But they show up in how fast we sell, how cautiously we re-enter, and how reflexively we chase when FOMO flips back on.

So when the S&P swings 1,000 points in six weeks, don’t just look at inflation data or jobless claims. Look at the psychology of price. Are we fighting the last war? Repeating the last mistake? Or just trying to forget?

Just over a month ago, the S&P index dipped below 5,000—headlines screamed correction, and everyone started whispering about stagflation. And yet here we are: ~5,900 and year-to-date losses erased. Fear forgotten. Again.

But not really forgotten. Because the market does remember. Not like a robot. Like a person. Because that’s what it is—a crowd with a collective memory, triggered by chart patterns, headlines, and the X accounts that want to remind you about the GFC, tech bubble, or depression.

It remembers pain. It remembers euphoria. And right now, it’s choosing euphoria again—at least until the next “unforeseen” event we’ll all pretend to be shocked by.

Because the market doesn’t suffer amnesia. It suffers denial.  As Howard Marks’ says: "the first cause [of market euphoria] is extreme brevity of the financial memory.”

Today’s Lesson: The Market Has a Subconscious (So Do You)

“Without our knowing it, we see reality through glasses colored by the subconscious memory of previous experiences.” Not the words you’d expect to see in a finance blog, but while the finance crowd’s subconscious doesn’t get airtime on CNBC it runs the show when the market swings a few percentage points. The problem is the collective subconscious probably doesn’t match your true goals and to make matters worse our own true goals can be buried within our own subconscious. 

The market’s subconscious shows up in sentiment, in panic, in denial and probably in every algorithm that is patterned off trading behavior.  The challenge is while the market memory is “real” it doesn’t fit into any spreadsheet, but we all see the subconscious of the collective leak out into the open when we get jarring moves.

If we want to invest well, dare I say sanely, we need a better relationship with our subconscious. The part of us that flinches as losses, panics at headlines, projects every fear into the next chart and also paradoxically gets lost in the euphoria when things are going well.

The monks say that prayer trains the inner life so they can find deeper truth.  Wall Street might say it is “process” that allows them to avoid falling prey to the delusions of the masses. But both are about cultivating awareness, discipline and humility. Finding space between reaction and response. 

You don’t beat the market by outsmarting it. You beat it by not becoming a puppet of your subconscious when it matters most.

So maybe the next time volatility spikes, don’t just check your exposure.

Check your interior life…and review these past posts, here and here. 

And if you don’t think all the investing greats would agree with this lesson then you're not paying attention.  

“Some people are not emotionally or psychologically fit to own stocks" - Buffett

“The ability to keep raw irrational emotions under control" - Munger

XTOD’s:

XTOD: Trade war on, yields up. Trade war off, yields up. Inflation beat, yields up. Dollar down, yields up. Dollar up, yields up. Risk on, yields up. Risk off, yields up. 

That is why this is not a dip, this is a triple infection of the secular order, cyclical expansion, and US bubble all at once, from the highest valuations in a century, already mid-recession with no intent to ease monetarily, delinquencies at or near highs, credit turning down, rapid earnings downgrades and…Pro-cyclical fiscal austerity, if not by choice then by imposition.

XTOD: Absolutely disgusting.  For every $1 you deposit in your IRA, Basic Capital will match $4 as a loan.  But interest on that loan is 6.26% and the account costs $300/year to maintain. Plus, they charge 0.50%/year on the investments and take 5% of your gains.  GTFOH.

XTOD: In 1971, the US ran out of money and defaulted on its debts. Now, they didn’t say it that way. But by moving away from the gold standard, money as we understood it ended.  

I expected the stock market to plunge, but it went on to rise nearly 25%. That surprised me. But when I looked into it, I discovered the exact same thing happened in 1933 and it had the exact same effect. Here’s why.

XTOD: Most people endure decades of work they hate, hoping one day they’ll be free.  Naval calls this “the deferred life plan.” And he believes it’s a lie.  “Looking forward to vacations takes the joy out of every day.”  For Naval, life isn’t something to delay. It’s something to design.

XTOD: I routinely write “No hurry, no pause” at the top of my notebooks as a daily reminder. 

You can get 95% of the results you want by calmly putting one foot in front of the other. 

One former Navy SEAL friend once texted me a principle used in their training: “Slow is smooth. Smooth is fast.”  Perhaps I’m just getting old, but my definition of luxury has changed over time. Now, it’s not about owning a lot of stuff. Luxury, to me, is feeling unrushed. 

No hurry, no pause.

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Daily Economic Update: May 13, 2025

 “Insidious non-tariff trade barriers.”

Insidious non-tariff trade barriers, that’s the terminology Treasury Secretary Scott Bessent repeatedly uses when discussing some of the challenges with fully getting to fair trade with China.  We talked about certain ways countries support their exports in this post back in February and as of now it doesn’t seem much progress has been made in addressing those issues. 

Nonetheless the 90 day pause on reciprocal tariffs, leaving just the 10% baseline plus the 20% fentanyl surcharge remaining, was welcome news to the market - sending the S&P up over 3% to 5,844.  

Term Premium

Ahead of today’s CPI report, rate cuts are being priced out. We're down to just two cuts for the balance of 2025 and we’ll see if the CPI report changes that.  The reason for the repricing seems to largely be the market pricing out near term tariff induced recession risks.  The 2Y Treasury ended the day reclaiming a 4 handle, ending at 4.04%.  

Out on the curve it’s been a minute since we talked about it, but “term premium” could still be a a topic to key your eyes and ears on, as the bond market continues to reassess the amount of excess yield they need to move out on the yield curve and remember topics like deficits and the loss of U.S. exceptionalism, oh and that whole topic of the credibility of the Fed.  Seems to me there could be plenty of reasons we shouldn’t forget about the fact that term premium can be a time varying variable.

CPI

Even with the U.S.-China reciprocal tariff pause, do we still have to worry about bullwhip effects?  Before we worry about that, the market will be looking for signs of tariff related impacts in the inflation data. Of course market participants also won’t really know what to do with any tariff related inflation data in the coming months because there is little agreement as to whether the inflationary impact of tariffs is temporary or more permanent. 

In the meantime could hotter than anticipated inflation coupled with trade optimism lead to even less certainty of rate cuts in the year ahead?  And what would Trump think about that?

XTOD’s:

XTOD: You’ve got to hand it to President Trump. He has convinced everyone that a 30% tariff rate on China, and a 13% average tariff rate on the world (was 2.5% in 2024), are both normal and manageable. Nothing like a 10-percentage point levy on this $30 trillion beast called Global Trade. The Art of the Deal is working brilliantly.

XTOD: As I predicted in the game of chicken between Trump and Xi it was Trump to blink and chicken out. The tit for tat trade war escalation started by the US would have spiked US inflation, led to massive supply chain disruptions and would have triggered a serious US and global recession that would have doomed the GOP and the MAGA grand goals by the 2026 mid term elections . So Trump had no choice but to blink while receiving almost no concessions from the Chinese side, not even an agreement like the one in 2019 to buy more US goods such as ag goods. Such modest concessions may emerge during the 90 day period where negotiations will take place to “reset” trade but so far Xi is the clear winner of this trade war .

XTOD: NEW TONIGHT: Our reaction to the House Ways & Means and Energy & Commerce bills out today, ahead of tomorrow's markups... or, "A Tale of Two Committees."  

The Ways & Means draft includes trillions of dollars in new and expanded tax cuts – some temporary and some permanent – along with some new savings to offset a small portion of them.  The Energy & Commerce Committee, meanwhile, put forward over $900 billion of offsets. 

Taken together, the two bills are likely to add trillions of dollars to the debt and set the stage for hundreds of billions or trillions more if expiring provisions are extended.  The following is a statement from CRFB President  @MayaMacGuineas : https://crfb.org/press-releases/tale-two-committees.

XTOD: 21 lessons from “A Few Lessons From Warren Buffett” (an 81 page book full of Buffett’s wisdom)

1.  A funny thing about life: if you refuse to accept anything but the best you very often get it. 

2. The truly big investment idea can usually be explained in a short paragraph.

3.  Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

4.  Loss of focus is what most worries Charlie and me.

5. When a problem exists, whether in personnel or in business operations, the time to act is now.

6.  The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.

7.  A compact organization lets all of us spend our time managing the business rather than managing each other.

8.  Nothing sedates rationality like large doses of effortless money.

9.  The most elusive of human goals: Keeping things simple and remembering what you set out to do.

10.  Just run your business as if: (1) You own 100% of it; (2) It is the only asset in the world that you and your family have or will ever have; and (3) You can't sell it for at least a century.

11. The right players will make almost any team manager look good. 

12.  Just tell me the bad news; the good news will take care of itself. 

13.  Our managers have produced extraordinary results by doing rather ordinary things—but doing them exceptionally well.

14.  It's difficult to teach a new dog old tricks.

15. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.

16. Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.

17.  Our experience has been that the manager of an already high-cost  operation frequently is uncommonly resourceful in finding new ways to add to overhead—while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors.

18.  Tomorrow is always uncertain.

19.  The trick is to learn most lessons from the experiences of others.

20.  In allocating capital, activity does not correlate with achievement.

21.  The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.

Download more of Buffett’s ideas into your brain by listening to episode 202.

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Daily Economic Update: May 12, 2025

It’s All About The Benjamins

The Diddy trial starts today.  Can I start a conspiracy theory linking the timing of the apparent U.S. - China trade deal and the Diddy trial just for fun?  Of course I can, this is precisely why the world invented AI chatbots.  Don’t believe me? Read on.

All Worlds Collide: Diddy, Tariffs, and the Sino-American Butterfly Effect

Call it a coincidence. Call it choreography. But tomorrow, two very different headlines hit the tape:

1. The trial of Sean “Diddy” Combs begins.

2. The U.S. and China are reportedly set to announce a major trade deal.

Now, I’m not saying Xi Jinping personally scheduled the trade announcement to distract from the Bad Boy Entertainment saga. But I’m not not saying it either.

Think about it. Diddy was once a symbol of American excess: champagne, private jets, velvet ropes. A walking export of 2000s capitalism. Meanwhile, China was quietly cornering the global supply chain while Diddy was cornering the VIP booth. Two empires rising in parallel—one built on rare earths, the other on remixes.

Fast forward to 2025, and both face a reckoning. Diddy, in court. China, in a geopolitical standoff with its biggest customer. And what happens? Their plotlines converge. Same day. Same news cycle. It’s like Crash, but with more tariffs.

You think this is random? You think some butterfly didn’t flap its wings in Shenzhen in 2004, causing a yacht to be rented for a Diddy party, which triggered a dollar carry trade, which juiced Chinese exports, which necessitated rebalancing, which led to the trade war, which now resolves itself right as Diddy goes on trial?

Please. Wake up.

This isn’t chaos. This is choreography. Or maybe it’s just capitalism doing what it does best: remixing everything—scandal, commerce, culture—into one beautiful, bewildering beat.

Anyway

Markets are optimistic ahead of the soon to be released details of the U.S.-China trade deal details, will the optimism carry the day, we’ll find out soon.

We head into the day with the S&P at 5,659 and the 2Y and 10Y Treasury yielding 3.93% and 4.41% respectively.

The Week Ahead

Features inflation data, retail sales and lots of Fedspeak.

Mon: Trade Deals and Geopolitics (remember India and Pakistan, Ukraine and Russia, Israel and Hamas?)

Tue: CPI

Wed:  Fedspeak

Thur: PPI, Retail Sales, Powell, Industrial Production

Fri: Housing starts and Building Permits, UofM preliminary

XTODs:

XTOD: Years ago in the first edition of "The Ascent of Money" @nfergus  laid out the interdependency brewing.  He called it "Chimerica:.    I suppose now one of the underlying questions is "If China is our lender - have we or have we not become too big to fail?" ; in the same way that a bank with loan out that is a substantial portion of a bank's assets - can't let the customer fail else the bank dies too.     There probably was a time in the not too distant past where "if America sneezed, China caught a cold" due to the interdependence. That is the open question - has that window passed, or not?

XTOD: So you’re telling me we got the rest of the world to do the lowest value, lowest profit margin, most capital intensive, and most cyclical parts of economic activity.  And in exchange, they gave our companies the cheapest priced goods in the world to resell and thrive off of. Which then gave our companies the time to pursue the actual high value parts of economic activity (you know, like Silicon Valley, Wall Street, military R&D, etc).  And all we had to do was give them IOU’s for an imaginary currency unit that we would only ever pay them back in worthless real terms in, if we ever repaid them at all.  And… we were the ones that demanded this system come to an end?

XTOD: So your firm pays $25K per year for your Bloomberg Terminal but you only use it to look at stock price charts and read news headlines all day?

XTOD: Pope Leo XIV explains his choice of name: "... I chose to take the name Leo XIV. There are different reasons for this, but mainly because Pope Leo XIII in his historic Encyclical Rerum Novarum addressed the social question in the context of the first great industrial revolution. In our own day, the Church offers to everyone the treasury of her social teaching in response to another industrial revolution and to developments in the field of artificial intelligence that pose new challenges for the defence of human dignity, justice and labour."

XTOD: If you don't prioritize your life, someone else will.

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Daily Economic Update: May 9, 2025

They’ll Soon Be Driving Ford F-150s in the U.K.

I made that up, but I’m pretty sure F-150’s are not for sale in the U.K., but now that the Trump administration announced a preliminary U.K. trade deal that will open access for American exports,  the Brits can dream big.  Importantly, the trade deal keeps 10% blanket tariffs on U.K. imports, leading some to speculate that this 10% “minimum” may be the best countries can do in negotiations with the U.S. meaning higher tariffs might be here to stay.  Also in the U.K. rates were cut to 4.25%, while citing, you guessed it - “uncertainty”.

Stocks liked the news, sending the S&P up to 5,663.  Yields rose partly on the rotation into risk on the trade news, but possibly also due to the fact that consumers surveyed by the NY Fed continue to push up their inflation expectations, now at 4.8%.  The 2Y ended at 3.88% and the 10Y at 4.38%.

Leo XIV

But the real news of the day was the announcement of the first American Pope, Robert Francis Precost, a Villanova graduate. He has assumed the name of Leo XIV 

The last Pope Leo, was a defender of Capitalism back in 1891.  You probably don’t remember but back in September 2024, I introduced you to the last Pope Leo and his famous encyclical Rerum Novarum in this post.

Lessons In Capitalism From The Vatican

Capitalism has had many critics. The Vatican, however, might be one of its most thoughtful ones.

In 1891, Pope Leo XIII’s Rerum Novarum tackled the “worker question” head-on—before “inequality” was a talking point and before socialists had a PR team. He called out socialism for undermining private property rights which he viewed as fundamental human rights, but he also saw the dark side of unchecked capital: workers stripped of dignity, paid less than a living wage, treated as inputs on a spreadsheet. Sound familiar?

Rerum Novarum didn’t pick sides. It said both capital and labor were necessary, both had duties, and that the State should side with neither but protect the vulnerable. It wasn’t a call to redistribute wealth by force, but a call to justice. Work was a vocation, not just a transaction. Wages were to support life, not merely clear markets.

A century later, Centesimus Annus (JP2’s remix) reminded the post-Cold War crowd not to declare victory just because “real socialism” collapsed. Winning by default isn’t the same as being right. The encyclical warned that capitalism without virtue—or democracy without values—could become a “thinly disguised totalitarianism.”  And that Totalitarianism itself is seen as opposing the Church because it denies the transcendent dignity of the human person and rejects objective criteria of good and evil.  Totalitarianism flattens the person into a cog, denying their inherent dignity. That’s why Centesimus Annus sounds the alarm: a democracy without values is just totalitarianism with better branding. It’s not just about who owns the means of production—it’s about who owns the definition of “good.

The lesson? Markets and enterprise are good—but not gods. Freedom isn’t license. Work isn’t just a paycheck; it’s a path to purpose. Development must be more than GDP. Markets can be messy—but they leave space for initiative, dignity, and surprise. Totalitarianism doesn’t. It promises order, delivers despair, and grinds the person down to a tool. That’s why the Church, as the “safeguard of transcendence,” insists: man is not a means—even for record profits.

XTODs:

XTOD: "To attain knowledge add things every day. To attain wisdom subtract things every day." - Lao Tzu

XTOD: An unsettling investment fact:  Stocks will have half-decade to full decade periods where they underperform cash by a significant margin.  If you aren't mentally prepared for this, you may give up when such times arrive.

XTOD: This is not an SNL skit.  Howard Lutnick: we feel really good about the deal….We started at 10% tariffs and ended at 10% and the market for America is better and this is a perfect example of why Donald Trump produced Liberation Day.

XTOD: So... the digital world has nearly eliminated friction (ChatGPT writes essays, Meta's AI plays your friend). The physical world drowns in it (Newark airport, infrastructure crumbles). And for those who can afford it, friction becomes an optional aesthetic choice (West Village living, curated experiences).   

This is an economic system where frictionlessness is this weird commodity and understanding it is really important. Warren Buffett sees it too. He warned of maintenance coming due as he stepped down this past weekend. The simulation economy can't run without physical infrastructure (as many have said) but we've optimized for short-term ease over long-term resilience. 

We've created three separate worlds operating on entirely different rules - and different levels of friction. link in next post, enjoy! https://t.co/ct5nYA05E3

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Daily Economic Update: May 8, 2025

A Great Deal Of Uncertainty - So Much Uncertainty

We all knew the Fed was going to hold at 4.25% - 4.50%. I skipped the recap out of respect—for your time and your intelligence.

So what, if anything did we learn.  In my opinion, not much. Here were my takeaways:

• There’s no rush to cut rates from their “modestly restrictive” level.

• Risks have risen to both sides of the Fed’s dual mandate and the reality is no one knows whether high unemployment or high inflation will be the more pressing problem.

• Patient Powell: “We’re in a good place to wait and see” “The cost to waiting is low” “Appropriate to be patient”

• “My gut tells me uncertainty about the path of the economy is elevated…the right thing for us to do is await further clarity.

My other major takeaway was that at least 80% of reporters seemed to be begging for rate cuts. I’d have to review the transcript, which I don’t care enough to do, but in real-time, the sentiment of most of the questions seemed to be pressing Powell for an explanation as to why “preemptive” rate cuts shouldn’t occur at present.

Below Is More Value Than Yesterday’s FOMC - You’re Welcome

“In making decisions under conditions of uncertainty, the consequences must dominate the probabilities" - Peter Bernstein.  There, that quote was more valuable than the press conference.  Most of this blog is simply writing about uncertainty. Author Robert Greene once wrote, "The need for certainty is the greatest disease the mind faces."  

And The Source Of Uncertainty - Tariffs (for now)

In response to a reporter's question about exempting certain baby products from Chinese tariffs, Trump indicated that he’s not open to removing the 145% tariffs on China as a means to getting the Chinese to the negotiating table.

We’ll see how the reported talks between Bessent and the Chinese go in Switzerland and in the meantime CNBC have their cameras watching to see if ships are coming into the Port of Long Beach.

But At Least AI Didn’t Destroy the World Today

Unless you were Google that is…Alphabet shares were down 8% as Apple exec said that search is toast as AI answers will replace those blue hyperlinks we’ve all become accustomed to seeing.

Overall the S&P finished slightly higher at 5,631. The 2Y and 10Y yield were little changed with the 2Y at 3.79% and the 10Y at 4.28%.

We’ll see if the BoE can be more exciting than the Fed.  

Utter Boredom
Until then you can reflect on this quote from Dune:  “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”

XTOD’s:

XTOD: Gem after gem.   1/ Mediocrity is invisible until passion shows up and exposes it.

2/ Time is the best filter. It is the only filter I trust. 3/ Victory is spelled survival.

4/ The hard way is the right way. 5/ What you want is money, but what you really want is meaning.

XTOD: China Slashes Rates and Reserve Ratios: Liquidity Lifeline or Desperation Signal?

China just fired a monetary bazooka. On May 7, 2025, the People’s Bank of China (PBOC) announced a 50 basis point cut to the Reserve Requirement Ratio (RRR) and a 10 basis point cut to key lending rates, unleashing an estimated ¥1 trillion (~$138 billion) of liquidity into the system. This is Beijing’s most aggressive monetary easing since the early COVID era. But don’t mistake this for routine stimulus. This is a signal and it’s flashing red…..Bottom Line:

Don’t let the mild rate cut fool you this is a liquidity distress signal from the world’s second-largest economy. Markets will celebrate short-term stimulus. But underneath, Beijing is bracing for impact

XTOD: The world doesn’t run to growth when things go wrong. It runs to shadows.  Today, two of those shadows — Switzerland and Hong Kong — are screaming.  The Swiss franc, too strong again. A currency not rising on strength, but on fear.  Prices in Switzerland? Flatlining. Demand, evaporating.  The SNB is watching inflation disappear — and with it, its reason to hold.  Zero is coming. Maybe negative. Again.  Half a world away, the Hong Kong dollar slammed into its upper bound.  The HKMA stepped in. First time since 2022. Not because the city’s thriving — but because the capital is clawing its way to safety.   Out of Asia. Out of credit. Out of risk.  These aren’t technicalities. They’re tremors. Tiny economies. Heavyweight currencies. Both surging not on confidence — but on risk aversion.  This is what stress looks like in a world of financial scaffolding.  When the safe havens get crowded, the system is telling you something.  The pipes are creaking. The air is thinning. Risk is rising. Rates are falling. 

Soft landing?  No. This is what remembering how to do worse looks like.

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